We agree with Wolfe Research: Own Salesforce into 2024. Just don’t call it a ‘value growth’ stock
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It’s been a cheery 2023 for Salesforce investors, as its stock has nearly doubled in price. Analysts at Wolfe Research don’t expect the party to end when the calendar flips to the new year – and neither do we. In a note to clients Sunday, Wolfe analysts upgraded Salesforce to a buy-equivalent rating and lifted their price target to $315 per share, implying about 20% upside from its Friday close. Twenty twenty-four is “the year to own this value growth stock,” the firm wrote, arguing Salesforce’s topline growth rate has bottomed out and management’s commitment to boosting margins “is real.” Shares of Salesforce rose 1.4% Monday, to just over $265 each, outperforming the broader market, which also gained in midday trading on the heels of a seven-week winning streak . Over the past month, Salesforce stock has advanced nearly 19%, making it the third-best performing Club holding in that stretch. Only Foot Locker , up 36.6%, and Palo Alto Networks , up 23.7%, have fared better. “This is one I would not take profits in,” Jim Cramer said Monday of Salesforce. “I want it to run.” In general, we share Wolfe’s optimistic outlook on Salesforce. But Jim takes issue with its characterization of the Club holding as a “value growth stock,” a hybrid term that combines two long-standing buckets for stocks: value or growth. “I think it’s a pure growth stock. I wouldn’t call it value,” Jim argued Monday. “It’s still accelerating. I just think that’s a misnomer for this great company.” While there’s no universally accepted definition on Wall Street, growth stocks generally trade at higher price-to-earnings ratios than their value counterparts. Investors are willing to pay up for the former because they expect those companies to see faster sales growth and deliver greater stock-price gains. Investors may look to so-called value stocks because they think the market is misjudging the firm’s prospects, resulting in an unwarranted discount, or they may be comfortable collecting a stock’s dividend payments alongside more modest share-price appreciation. For many years, there was little debate that Salesforce had two feet in the growth bucket, as its topline grew at an annual clip above 20%. But over the past year, amid a tougher economic environment, its revenue growth rate decelerated into the mid-to-low teens, raising questions about whether Salesforce’s best days were behind it. At the same time, though, newfound cost discipline has helped Salesforce’s adjusted earnings-per-share (EPS) grow substantially on an annual basis – 72.5%, 78% and 51% over the past three consecutive quarters. And that’s ultimately the kind of growth we covet most. To be sure, in the coming quarters, Salesforce will face tougher year-over-year comparisons on profitability metrics, including EPS, because the company embarked on its aggressive cost cuts in January 2023 . It didn’t take long for those actions – which came in response to fierce pressure from activist investors – to start showing up in Salesforce’s financial results . The first signs arrived in its fiscal 2023 fourth-quarter numbers, reported in March, and have continued to be present in Salesforce’s three subsequent earnings reports, including the one issued Nov. 30. Still, Salesforce is poised to deliver robust earnings growth in the quarters ahead, which in turn should help the stock build on its 2023 advance in the new year. That expectation primarily relies on two assumptions, both of which Wolfe touted in its Sunday note. The first is that Salesforce’s revenue growth rate has reached its nadir and should remain in the double-digit percentages going forward. In its fiscal 2024 third quarter, Salesforce saw 11% sales growth on an annual basis, while guiding for fourth-quarter growth of 10%. On the company’s post-earnings conference call last month, CEO Marc Benioff mentioned some “green shoots” in the business environment that left us feeling encouraged about the future pace of topline growth. Indeed, the company’s current remaining performance obligations – which represents future revenue under contract that is set to be booked over the next 12 months – increased 14% in the quarter, ahead of the 11% figure projected by analysts. The second assumption is that Salesforce’s profitability hasn’t plateaued, with more margin expansion on the horizon. In its fiscal 2024 third quarter, Salesforce’s adjusted operating margin came in 31.2%, compared with 22.7% in year-ago period. “30% operating margins are cool, but getting to 40% over the next few years would be iconic,” Wolfe analysts wrote. A bottoming in the revenue growth combined with further margin expansion should help Salesforce maintain an earnings growth rate that we deem worthy of a growth-stock designation, without the “value” qualification. The potential for Salesforce’s topline to possibly reaccelerate sometime soon – tied to its generative artificial intelligence initiatives, an improving economic picture or some combination of the two – could be even more powerful. That would showcase a financial concept known as operating leverage , in which more of the revenue dollars Salesforce generates flow to its bottom line, a result of its lowered cost base. (Jim Cramer’s Charitable Trust is long CRM, FL, PANW. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. 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Marc Benioff, CEO of Salesforce.com, speaks during a keynote at the Dreamforce 2023 conference in San Francisco on Sept. 12, 2023.
Marlena Sloss | Bloomberg | Getty Images
It’s been a cheery 2023 for Salesforce investors, as its stock has nearly doubled in price. Analysts at Wolfe Research don’t expect the party to end when the calendar flips to the new year – and neither do we.
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